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Emami's Kesh King coming out of GST tangle

The company is now "revisiting" its strategy to "broadbase" its distribution network as offtake of its wholesale-driven brands such as Kesh King and Pancharishta fell post GST rollout

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The implementation of goods and service tax (GST) has made Emami "revisit" its strategy for pushing sales of its wholesale-driven ayurvedic hair and scalp-care brand Kesh King, which it had acquired in June 2015.

In its annual report for the financial year (FY) 2018, the Kolkata-based company said that implementation of GST resulted in "biggest declines in offtake of its wholesale-driven brands such as Kesh King and Pancharishta".

The wholesale business bore the "brunt" as the fast-moving consumer goods (FMCG) sector posted its slowest revenue growth rate in two years, with a compounded annual growth rate of 4% versus 13% across the last decade, according to the report.

The skin and healthcare company is now focusing on widening its direct distribution network and reducing dependence on trade partners over the last few years. It has added more than 1.2 lakh direct retailers in the last one year and brought down its dependence on the wholesale channel to 38% of its domestic revenues.

Emami is now "revisiting" its strategy to "broadbase" its distribution network, the annual report said.

Emami's chief executive officer (finance strategy and business development) and chief financial officer Naresh Bhansali could not be reached for his comment.

According to Emami's spokesperson, the company cannot divulge details of its strategies immediately. However, there may soon be new communication activity for Pancharishta, the spokesperson added.

In 2015, the company bought Kesh King brand from SBS Biotech Ltd for around Rs 1,651 crore, one of the largest deals in the FMCG space in the recent times. The acquisition was widely seen as "expensive" by analysts, which was at 5.5 times the turnover reported by the brand in 2014-15. Kesh King was generating around Rs 50 crore in revenue each quarter at the time of the deal and Emami had raised Rs 900 crore to fund it partially.

Soon after, the company reported that the earlier promoter of the brand under-reported Kesh King inventory in trade channels, leading to overflowing stocks and price mismatch with distributors in several states. Though Emami later resolved the issues by going for a buyback of unsold stocks to correct the situation.

It also had to write off around Rs 60 crore every quarter towards amortisation cost of Kesh King intangibles.

Meanwhile, Emami has taken the brand outside India by rolling it out in Bangladesh and test-marketed it in Nepal and the UAE. According to its annual report, the brand has a share of 27.9% in the domestic market.

In a recent analysis on Emami, Motilal Oswal Securities Ltd said that Kesh King and Pancharistha had a "very bad phase" in fiscal 2018 as they were "highly wholesale-dependent products". However, there seems to be some revival in Kesh King in fourth quarter of the last fiscal and it is expected to do better this fiscal led by change in strategy, the report added.

The company's direct reach expansion, on the other hand, will augur well from a longer-term perspective as wholesale trade is, at times, uncertain and susceptible to disruptive events, the report said.

Research analyst Sathyanarayanan M of Cholamandalam Securities Ltd said that the decline in Kesh King and Pancharishta last year was primarily on account of GST and larger exposure to wholesale channel. The high base effect also kicked in for Pancharishta as there was robust growth in Emami's healthcare segment in the previous year.

However, the company reported a growth of 6% in Kesh King in the fourth quarter of last fiscal compared to degrowth of 19% in the third quarter, he added.

According to him, the company did activities like rejuvenation of brands, change in their design, go-to-market strategy and also in brand positioning, which started to show results.

Sathyanarayanan expects around 12-15% growth for Kesh King for the full year. Trade channels have started improving and coupled with base effect, it will help the company post a strong overall revenue growth, he said.

The analyst expects Emami's revenue growth to be around 19% to Rs 634 crore in first quarter of the current fiscal against a degrowth of 17.8% a year ago. Operating margin may see improvement of 350 basis points on year and Ebitda (earnings before interest, taxes, depreciation and amortisation) margin to be around 6.8%.

Emami will announce its first quarter result on August 1.

EYEING GROWTH

  • The skin and healthcare company is now focusing on widening its direct distribution network and reducing dependence on trade partners over the last few years
     
  • It has added more than 1.2 lakh direct retailers in the last one year and brought down its dependence on the wholesale channel to 38% of its domestic revenues
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